Dear Mr. Farris, your comments on shareholders are a bit much

By Loren Steffy |
October 12, 2007

Ah, the good ol' days, when management did what it pleased and investors kept their mouths shut.

Steven Farris, the chief executive of Apache Corp., seems to be pining for that sort of bygone attitude toward corporate governance in a letter he sent last week to the Securities and Exchange Commission.

Farris voiced his opposition after the SEC requested comments on a proposal that would allow shareholders to nominate their own candidates for corporate boards.

He argues that the commission's proposal would allow special interest groups and private equity funds to exercise too much control over companies and force them to do things that aren't in their long-term best interest.

In making his point, Farris isn't above a little fear-baiting:

"Private equity investors and other hostile takeover artists would be delighted to buy U.S. public oil and gas companies, deplete their resources, fire all the employees and cash out," he wrote.

"By neglecting investment in future production and firing those who know how to find and recover oil and gas, these predators could get rich quick, but at the expense of America's future energy security."

Usually, equity firms have the support of management, which reaps big rewards from the deal.

In fairness, Apache is in the oil business, an industry that knows a thing or two about hostile investors.

Corporate raiders of the 1980s such as T. Boone Pickens cut their teeth in the Oil Patch.

Those battles aren't just distant memories.

Two years ago, an '80s raider-turned-activist-investor, Carl Icahn, made a run at Kerr-McGee.

The battle left the company saddled with debt and forced it to sell properties in the North Sea. Later, at Icahn's behest, it also sold its chemical business and, eventually, the entire company was gobbled up by Anadarko.

So I can understand Farris' concern. But he doesn't bother to address why companies like Kerr-McGee attract private equity interest in the first place.

Equity firms typically seek companies that are poor performers, which often means they're poorly run as well.

Apache's done well

Apache itself hasn't had such problems. Its stock has done well, rising almost 50 percent in the past year.

Earlier this year, though, it was forced by the SEC to include a shareholder proposal from a labor group in its proxy statement.

Farris' solution: eliminate proposals.

"Nonbinding proposals should not be permitted at all," he wrote.

I decided to bounce that off an Apache shareholder — not a special interest group, but just an average stockholder who believes boards should be accountable to the investors they represent.

Mathis has filed a lot of shareholder proposals over the years, and he's used them to change behavior at companies such as Baker Hughes, Reliant and CenterPoint.

Mathis thinks Farris is overreaching in hanging the potential demise of the U.S. oil industry on investor input.

"He can't blame all that on shareholder proposals," Mathis said. "Nonbinding shareholder proposals have forced a lot of board action."

Companies, of course, try to ignore shareholder proposals, even if most investors support them.

Ignored a majority vote

Of the 31 companies where at least 20 percent of the votes for directors were withheld this year, nine of them were because the company ignored a majority vote of shareholders on nonbinding proposals, according to a report by RiskMetrics, a proxy advisory firm. (Farris, by the way, doesn't like proxy advisers, either.)

Farris seems to think executives and directors should handpick their boards. That might work for Apache, but we've seen the consequences at other companies where cozy directors coddled management instead of safeguarding shareholder interests.

It hearkens to the corporate governance of yesteryear, to the days of empirical CEOs, golf-buddy boards and muffled investors.

It's a rearview vision that should scare investors more than buyouts and proxy proposals.